When asked, these homebuyers said they could afford a monthly mortgage payment of £780 a month. However, based on a 10 per cent deposit, the repayments on a £235,000 property would be nearer £1,300 a month – and potentially much more depending on credit history and lenders policy rules.
The Experian data found that of a typical buyer’s household income, £371 goes on socialising and hobbies each month. Mandatory living costs such as food eats up £603 and existing credit obligations, £248. All-in-all, potential homebuyers are left with £760 disposable income each month – far short of what a probable repayment would be.
In the case of first-time buyers, they are targeting a home worth £193,000 and could see their mortgage payments soar to £1,060 on the same two-year deal mentioned above – 60 per cent more than the typical first-time buyer can afford.
The situation would become even more challenging when the Bank of England increases interest rates, a situation likely to happen in the next 12-18 months. Although people may be able to afford such a property at present, even small interest rate hikes could make monthly repayments difficult to afford and leave little available cash at the end of the month for unforeseen living costs, according to Experian. Should variable rates rise from 4 per cent to 6 per cent at the end of a typical two-year fixed deal, mortgage payments would soar to an estimated £1,400, almost double what the average homebuyer claims they can afford.
The Mortgage Market Review, which came into force in April, has made it harder for homebuyers to obtain a mortgage and personal finances are being probed more than ever by lenders, who are now stress-testing buyers to make sure they could afford mortgages if hikes happen in the future.
Peter Turner, MD of Experian Consumer Services, said:
‘It is somewhat concerning to see such gaps in first time buyers’ awareness of long term affordability and the possible impact of interest rate increases. As the economy improves, interest rates will inevitably rise, and for first time buyers, who often have less discretionary income, they could well be hit the hardest. It is vital that people understand and take control of their financial situation now to ensure that your dream home does not become a financial nightmare.’
Separate data from Payplan shows that 30 per cent of people couldn’t pay their debts if interest rates went up. A survey of 2,000 by the debt management firm shows that nearly half of homeowners have a disposable income between £100 and £500.
It also found 41 per cent of people are in debt and playing a dangerous juggling act to try and balance their finances. Respondents are dedicating hundreds of pounds a month to debt repayments, spending a third of their disposable income to try and stay in control.
John Fairhurst, MD at PayPlan, said:
‘People are often just one step away from dropping all the balls they have dangerously balanced. If they were to find themselves having to pay an unexpected bill, something would have to be sacrificed to accommodate this, leaving them with even more problems.’
Sources: http://press.experian.com/United-Kingdom/Press-Release/underprepared-and-out-of-pocket.aspx, https://www.payplan.com/2014/06/07/hopeful-homebuyers-face-mortgage-misery/
